The black list of the FATF. How does it threaten Russia?

The black list of the FATF. How does it threaten Russia?

This week saw the start of plenary meetings of the main international anti-money laundering organisation, FATF, which could consider blacklisting Russia, which is more of a political nature. To date, there have been no official statements on potential action against Russia; however, a number of media outlets are actively discussing such a possibility.

What are the risks of Russia getting on the FATF’s “black list”? What risks does it entail? How likely is it that the decision will be made as early as this week? These and other questions were discussed by experts.

An undesirable scenario

The FATF plenary week takes place in Paris from 19 to 23 June and Russia risks being lumped in with Iran, North Korea and Myanmar. It is known that FATF will publish its decision following the plenary meeting on Friday at 18:00 Moscow time.

Changing Russia’s status within FATF is an undesirable scenario as it could increase the country’s financial isolation as well as restrict trade with other nations. Trade relations with blacklisted countries are highly cautious due to the fact that any transfers to such jurisdictions come under suspicion. At the same time, the negative consequences will not only affect Russia.

Bloomberg previously reported that Russia had reached out to at least 12 countries, including Saudi Arabia, Turkey, India, Mexico and the UAE, warning that the decision would negatively affect investment and cooperation in energy and defence, and that doing business with Russia would be more expensive. According to calculations cited by Bloomberg, changing Russia’s status would cost Turkey and the UAE nearly 1% of GDP through losses in trade and investment.

According to Bank of Russia Governor Elvira Nabiullina, the Russian Federation is trying by all means to convey its position, stating that there are no objective reasons for excluding the country from FATF, Interfax writes. On the sidelines of SPIEF-2023, Nabiullina told reporters that following a comprehensive audit in 2019, Russia’s anti-fraud system was found to be effective, while it continues to operate and develop. The Central Bank governor stressed that if a politically motivated decision were taken, making payments would become more difficult, compliance deadlines would increase, and refusals to make payments would become more frequent, worsening foreign trade activity. At the same time, according to Nabiullina, such a decision would not be able to stop foreign trade, and for large items should not have a significant impact on the volume of trade, although the costs associated with compliance, of course, will increase.

Finance Minister Anton Siluanov made similar statements, stressing that Russia is in the top five for compliance with all anti-compliance requirements, so the basis for putting Russia on the penalty list would be purely a political decision.

FATF and the facts

The FATF was set up in 1989 to develop and implement international standards in the field of anti-money laundering and countering the financing of terrorism (AML/CFT). The main guidance document is the 40 Recommendations on AML/CFT. At present the group includes 37 jurisdictions and 2 international organizations, researches and analyses channels of money laundering, develops countermeasures and evaluates compliance of the member countries (which number exceeds 200) to these standards.

The FATF blacklist was first published in 2000. It included Russia, Ukraine, Egypt, Nigeria, Israel, Indonesia, Hungary and numerous offshore states, while today the list includes only three countries: North Korea, Iran and Myanmar. Russia was removed from the list in September 2002, following the first assessment of the compliance of its AML/CFT system to international standards, and became a FATF member in 2003. Subsequently, Russia has regularly reported at the organization’s plenary meetings on the progress made in improving the national AML/CFT system.

However, in February this year, FATF suspended Russia’s membership in the group, citing that Russia’s actions in Ukraine contradicted the organization’s basic principles, and now Kiev is pushing for tougher measures.

To be or not to be

As Dmitry Polevoy, Investment Director at Loko-Invest, points out, back in February 2022 FATF refrained from specific sanctions. In June 2022, all of Russia’s core powers in the organisation were significantly restricted, and in February 2023, Russia’s membership was suspended altogether, with requirements to comply with all basic anti-money laundering regulations retained. According to the expert, the FAFT can change its decisions in any direction at any of the plenary meetings, but each country usually has a date chosen for the final assessment, and decisions on Turkmenistan, Kazakhstan and Luxembourg are expected in June. “Formally, a review of Russia’s status is not planned, but because of the suspension of its membership and the sensitivity of such decisions, we accept that the issue could be discussed at any of the meetings,” Polevoy stresses. At the same time, negative decisions cannot be completely ruled out, according to the expert, although it is unlikely that such a radical tool will be used now, and the West may keep it in case of a more serious escalation.

“In the baseline scenario, we do not expect Russia’s status to change as a result of the upcoming consultations. Putting the country on the blacklist would mean an almost complete halt to foreign trade and financial flows – it is unlikely that the West and all other countries would be interested in that. So far, the sanctions agenda has been shaped by considerations of maximizing damage to Russia and minimizing it for the initiators of the sanctions. The oil sanctions, for example, are designed to reduce oil revenues while maintaining supplies on the world market,” says Dmitry Polevoy.

At the same time, FATF has another tool – adding the country to the “grey” list, which now includes 23 countries, including the UAE, Turkey and South Africa. In this case, it would only mean intensified monitoring of the actions of the listed country, which must correct deficiencies as soon as possible. According to Polevoy, adding Russia to the grey list could (in theory) be discussed in the context of the West’s fight against sanctions circumvention, but it is unclear how this could be implemented even procedurally against a suspended country. “We believe that external financial institutions have already significantly tightened compliance/KYC procedures for Russian residents and SWIFT payments are only available to a limited number of banks. Therefore, something is unlikely to change dramatically in a ‘grey’ scenario, although transaction costs will increase further,” he stressed.

Meanwhile, Ekaterina Vorkunova, a lawyer in the International Law and Tax practice, says the news that Russia wants to be excluded from the anti-fraud group first broke in the summer of 2022, and the renewed action to exclude Russia, although in the absence of official comment from the organisation, seems “outrageously excessive”. “Given the fact that Russia’s FATF membership has been suspended since February 2023, the move to expand Russia’s blacklist, which currently includes Iran, North Korea and Myanmar, seems inconsistent with the organisation’s official goals and principles,” she said. According to Vorkunova, there are serious concerns that FATF will take a decision that is negative not only for Russia but for all of the country’s foreign trade partners. Given the fact that Russia is an important strategic partner of India and China, as well as the increased participation of individuals from Russia in the UAE economy over the last year, all hope, according to the expert, remains in blocking this decision by the “friendly” members of the group.

Inclusion in the FATF blacklist will also affect ordinary citizens

As Ekaterina Vorkunova said in response to questions, in addition to the sanctions packages imposed by the EU, the US and Canada, the inclusion of Russia in the FATF blacklist will significantly affect the foreign economic activities of companies from Russia as well as ordinary citizens who make international transfers. “According to the official FATF directive, the first and main negative consequence of such a measure is the difficulty in conducting international transfers, as any transactions by senders from Russia will be reflected in the domestic banking systems as high-risk. Hence, it is not only the reluctance of foreign banks to make payments under the risk of secondary sanctions, but also the technical complexity of making them, because according to the official position of the FATF – all banking institutions must exercise “due diligence” in business relationships and transactions with persons (both individuals and entities) from the blacklisted countries. In addition, targeted countermeasures and financial sanctions are allowed against branches and subsidiaries of financial institutions from the blacklist (primarily foreign branches of banks) – FATF has the right to demand enhanced control over their reporting and tighten requirements for external audit”, – said a lawyer of International Law and Tax practice.

About the author